4.26.2016 Revamping Dodd-Frank: Battle Lines Are Being Drawn

The Dodd-Frank Wall Street Reform and Consumer Protection Act has had its share of critics since it was signed into law nearly six years ago. Perhaps none has been more vocal than Rep. Jeb Hensarling, the chairman of the House Financial Services Committee.

Over the past couple of years, Rep. Hensarling has supported several different bills designed to scale back the massive law that has overhauled the financial services industry. Now he is poised to introduce a new bill of his own that would, among other things, ease regulations faced by community banks and require that a cost-benefit analysis be performed to assess how any new proposed regulations would impact the economy before they’re implemented.

Up to the Banks

One of the main complaints Dodd-Frank critics (including Rep. Hensarling) have about the law is the fact that it has forced banks to raise billions of additional dollars to meet higher capital requirements. Under Rep. Hensarling’s plan, banks can elect to hold more capital — if they do, they will obtain relief from Dodd-Frank regulations. Essentially, it would be up to banks to decide if they want to raise additional capital or not.

“If a bank chooses to have a fortress balance sheet that protects taxpayers and minimizes systemic risk, then bankers ought to be allowed to be bankers,” Rep. Hensarling told an enthusiastic audience at the American Bankers Association annual summit in March. The plan he previewed at the summit didn’t specifically indicate what new capital levels would be, but Rep. Hensarling indicated that the definition would be broader than it currently is.

In addition, Rep Hensarling’s plan would impose tougher penalties against banks that engage in wrongdoing and defraud consumers. It would also expand on some changes included in another bill already passed by the House that would require the Fed to provide public notice and allow for comment on stress-testing scenarios for mega banks. And his plan would require regulators to disclose a summary of stress-test results if banks must revise and resubmit them.

A Republican Agenda Blueprint

Neither Rep. Hensarling nor other Dodd-Frank critics expect this bill to go anywhere this year, before the Presidential election. Instead, they view the bill as a blueprint to help frame the Republican agenda between now and the election in November.

Should the Republicans win the Presidency and retain control of Congress, they could then be in a good position to move forward quickly with Dodd-Frank repeal or revamp efforts. Each of the remaining Republican candidates for President has called for Dodd-Frank’s repeal, though none have offered any specifics.

One analyst has pointed out that this plan could be detrimental to the mega banks if it ends up requiring very high capital levels for them. It could even open the door for the restructuring of some mega banks, this analyst notes.

No timetable has been offered yet for when Rep. Hensarling’s bill will be introduced into the House, other than “soon.” So keep an eye out for the latest developments.

We’re interested in hearing from you. What do you think about proposals to revamp or repeal Dodd-Frank? Send me an email at steven@lendtrade.com.

4.21.2016 Will New-Vehicle Sales Plateau This Year?

Last year saw record new car and light truck sales of 17.5 million, the highest level since 2000 and a 5.7 percent increase over 2014. This year, though, the industry could be looking at a plateau in new-vehicle sales.

The CEO of a major automotive group said as much at the recent Automotive News World Congress, based on slowing sales at his group during the fourth quarter of last year. If sales do level out this year, many dealerships will be forced to increase discounting, maintain higher vehicle inventories and adjust to lower vehicle margins, he added.

Economic Factors Affecting Vehicle Sales

Another factor some industry experts point to that could lead to a sales plateau this year is the fact that the economic recovery is now seven years old. In the past half-century, there has only been one recovery longer than eight years, so this recovery could be nearing its end.

This, of course, could have a big impact on new-vehicle sales. It’s estimated that a one percent decline in U.S. GDP could ding new-vehicle sales by one million units.

Among the big unknowns that could impact the economy (and hence new-vehicle sales) are possible interest rate hikes, economic slowdowns overseas (for example, in Asia and Europe) and the Presidential election. China’s rapid slowdown is especially concerning, given that it is the world’s second largest importer of cars.

Nobody knows exactly what the Fed is going to do with interest rates, though it’s generally assumed that it will likely raise rates at least one or two more times this year. But perhaps the biggest unknown is the Presidential election. Our nation hasn’t seen an election cycle like this one since, well, maybe ever. If Donald Trump or Bernie Sanders is elected, this could lead to huge economic uncertainty — which isn’t good for the economy or car sales.

For their part, the National Automobile Dealers Association (NADA) is projecting new light-vehicle sales of 17.7 million this year, a slight increase over last year. Most other industry experts at the Automotive News World Congress were projecting that new-vehicle sales this year would top 17 million.

Preparing for a Plateau

Many dealership CEOs at the Congress said they’re preparing for a sales plateau. As one put it, “it would be hard for me to imagine that people didn’t become really knowledgeable during that time (the 2008-2009 recession) on what to do and how to adjust when downturns take place.”

One strategy many dealers are adopting is to place more emphasis on their parts and service departments and used car sales, where margins are typically higher than new car sales. Some are hiring more service technicians and mechanics and expanding their service department hours into the evenings and even on Sundays.

NADA’s Chairman doesn’t believe that most dealerships (especially small dealers) will feel much of a pinch if sales flatten out this year. However, he still urges caution and encourages dealerships to be proactive in planning for a sales slowdown. For example, dealerships should watch their borrowing costs closely, control inventory carefully and keep a close eye on key economic indicators (like the unemployment rate) that could directly impact car sales.

Meanwhile, there is a possible silver lining to plateauing new-vehicle sales: They force dealerships to get creative when it comes to increasing used-car sales and improving the performance of their parts and service departments. In a flat-sales environment, dealership mergers and acquisitions could also become more economically feasible, one CEO at the Congress pointed out.

We’re interested in hearing from you. What do you expect for new vehicle sales this year — a plateau or a decrease or increase in volume? Send me an email at steven@lendtrade.com.

4.16.2016 As Housing Industry Improves, HELOC Lending Soars

Seven years after the housing bust of 2008-2009, the housing industry is rebounding nicely. Home prices are on the rise and housing supply is tight in many areas of the country.

These are among the factors behind a trend toward more homeowners choosing to stay in their homes and remodel them rather than move into a new home. And this, in turn, has helped lead to a surge in home equity lending.

Consistent Growth in HELOC Volume

According to Equifax, lenders originated home equity lines of credit with limits of $146.1 billion last year. This marked the fourth consecutive year of growth in HELOC lending.

What’s more, it’s up 20 percent from 2014 — and double the volume of HELOC lending five years ago when it bottomed out at just $73.2 billion in 2011. However, volume is still far below the $350 billion in HELOC originations that occurred in 2005 before the recession.

One reason for the steady uptick in HELOC volume is rising home prices, which are up 35 percent since 2012, according to S&P/Case-Shiller Home Price Index. What’s more, the average home price is now within 5 percent of its peak a decade ago. As home prices rise, so does the equity borrowers have in their homes — and many are choosing to tap this equity for a wide range of financial purposes.

Other reasons cited by industry experts for the surge in HELOC lending are rising consumer confidence and falling unemployment. Also throw in the fact that the recession and housing crash are drifting further and further away from view in the rear view mirror. When combined, these factors are making homeowners more comfortable again with home equity borrowing.

How Is the Money Being Used?

Interestingly, the most common uses of HELOC funds today are different from how homeowners used this money a decade ago. Back then, many borrowers tapped their homes’ equity to pay for luxuries like fancy vacations and new boats and RVs, as well as home improvements.

Today, the most common uses of HELOC funds are home improvements, debt consolidation, financial emergencies and education expenses, both college and K-12 private school. Put another way, homeowners today appear to be using home equity funds for more practical, rather than extravagant, purposes.

Tight Underwriting Standards

Underwriting standards for HELOCs remain fairly tight. According to Equifax, the median credit score for HELOC borrowers today is 788, with a minimum score of around 640. However, lenders are showing more flexibility in their HELOC underwriting.

For example, some lenders have eased their debt-to-income requirements for HELOC borrowers. Others are allowing homeowners to borrow up to 85 percent or even 90 percent of their home’s value (via a first mortgage and HELOC combined), compared to 80 percent previously. However, we’re not likely to see the 100 percent-plus HELOCs that were not uncommon before the mortgage crisis.

Obviously, higher HELOC volume is good news for lenders and the banking industry. If the recent positive housing industry trends continue, there’s no reason to believe that HELOC volume won’t continue to rise in 2016 and the years to come.

We’re interested in hearing from you. What do you think about rising HELOC volume? Do you expect it to continue this year? Send me an email at steven@lendtrade.com.

4.8.2016 New Type of Perk Helps Pay Off Student Loan Debt

In a growing trend, some businesses are adding a new employee perk to the standard offerings of health insurance, a 401(k) match and paid time off: paying off their employees’ student loans.

The statistics regarding outstanding student loan debt — which now totals $1.2 trillion and trails only home mortgages as the second largest type of consumer debt in the U.S. — have been well-publicized. Given that Millennials are now the largest demographic in the workforce, some companies believe that paying off Millennial employees’ student loans can help them stand out from other businesses in the race to attract top young talent.

Limited for Now

Granted, this new type of perk isn’t yet widespread. According to a recent survey conducted by the Society for Human Resource Management (SHRM), just three percent of employers offered this benefit in 2015. However, a few big-name corporations are among them, including PricewaterhouseCoopers, which now offers it as part of a pilot but plans to roll it out to all employees this summer.

New firms are also popping up to help businesses manage the process of making payments to their employees’ student loan accounts. One of these, Gradifi Inc., has more than 100 companies lined up to launch student loan repayment programs using its platform, according to a recent article in The Wall Street Journal.

Student loan debt repayment programs can be structured in different ways. Some companies are putting a certain amount of money each month toward loan repayments (such as $100) with a cap on total payments. Others, meanwhile, are making payments until employees’ student loan debts are repaid in full, assuming employees remain with the company this long.

For their part, college students and Millennial employees seem to like the idea of this new benefit. More than half of current students and recent grads who had student loan debt said they’d rather have this benefit than health insurance, accounting to a recent survey. And almost half said they’d prefer this benefit to a 401(k) plan.

The Tax Consequences

One important distinction between repaying outstanding student loan debts and some other employee benefits like making matching 401(k) contributions is the tax treatment of these perks. Unlike matching 401(k) contributions, student loan debt repayments are taxable to employees.

Therefore, businesses and employees should factor in the tax consequences when deciding which benefit provides the most bang for the bucks. Also unlike a 401(k) plan, once the student loan debt is completely paid off, the benefit ends. The long-term growth potential of 401(k) matching contributions is another factor to consider when comparing these two different types of perks.

However, it may not be a matter of one or the other, as some companies are offering both of these perks to employees, in addition to health insurance. The more competitive the job market in a particular industry, the more likely it is that employers will offer all three types of benefits as they strive to attract the best and brightest young employees.

Another thing to keep in mind: Employers can choose to pay employees slightly more than the loan repayment amount to compensate for the taxes due on the payments. This would effectively neutralize the tax consequences.

Help from Congress

Given the potential of this new type of employee benefit to become more widespread in the future, Congress is considering legislation that would ease the tax burden on employees. Specifically, a Senate bill was introduced in January that would enable businesses to repay up to $5,500 a year of their employees’ student loan debt on a pre-tax basis.

And unlike some other legislative proposals designed to help alleviate the student loan debt crisis, this bill has some bipartisan support — for now.

We’re interested in hearing from you. What do you think about this new type of employee perk? Send me an email at steven@lendtrade.com.